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Trump’s Trade Wars Are Incoherent, Angry and Misguided

The US Constitution vests authority in Congress to collect
duties and to “regulate commerce with foreign nations.”
But over the course of the 20th century, Congress delegated some of
that authority to the president through legislation. Although the
purpose was, ultimately, to facilitate the process of
reducing tariffs, President Donald Trump has
systematically weaponized a few statutes to serve a small-minded,
protectionist, “America First” trade policy.

Since taking office, Trump has misappropriated his authority to
launch six investigations under three seldom-invoked trade laws.
Five of those investigations have led to the president imposing or
announcing tariffs on imports of more than 1,500 products (steel,
aluminum, washing machines, solar-panel components, and, mostly,
Chinese technology products) valued at about US$100 billion. A new
investigation into whether imports of automobiles and parts
constitute a national-security threat could lead to sanctions on
another US$300 billion of imports. Taking into consideration the
likelihood of commensurate retaliation against American exporters,
US$800 billion of US trade — or about 20 percent of total US
trade in goods — could be ensnared in a trade war by
year’s end. And that assumes no new cases or an escalating
tit-for-tat.

The last 13 presidents of the United States — going back
to Franklin D. Roosevelt, who signed into law the watershed
Reciprocal Trade Agreements Act in 1934 — considered trade to
be mutually beneficial for their fostering of economic growth and
good relations among nations. Those presidents aimed to avoid trade
wars and committed their administrations to reducing barriers,
respecting the rules, and supporting the institutions of trade.

US President Donald Trump
has single-handedly set fire to the global rules-based trade order
that Washington was so instrumental in establishing after the
Second World War.

Trump sees the world differently. He has departed from more than
80 years of US trade policy continuity, charting a new and deeply
troubling course. Although Trump is not the first president to
blame foreign trade practices for problems real and imagined, he
may be the first to believe that protectionism is essential to
making America great. He is certainly the only head of state ever
to tweet that “trade wars are good, and easy to win.”
Trump’s trade policy is motivated by a toxic blend of
ignorance, petulance and nationalist grievance.

Keeping the Wrong Kind of Score

More than anything else, economic fallacies inform this
president’s trade views. Unlike his predecessors, he sees
trade not as a win-win proposition, but as a zero-sum game with
distinct winners and losers. Exports are Team America’s
points; imports are the foreign teams’ points; the trade
account is the scoreboard. Since the board shows a large overall
deficit, and many bilateral deficits with individual countries, the
US is losing at trade — and it’s losing because
Trump’s predecessors were bad negotiators and because the
foreign teams cheat. But in those US trade deficits, Trump also
sees leverage.

Countries registering surpluses, Trump reckons, are more
dependent upon the US market than US exporters are on theirs,
making the threat of tariffs — even trade wars — an
effective and powerful tool to compel foreign governments to cave
in to his demands. Yet, so far, there has been very little
acquiescence to those demands. Under the threat of steel tariffs
and US withdrawal from their bilateral trade agreement, South Korea
opted to put out the fire by agreeing to limit its exports of steel
and raise its quota on imports of US automobiles. Other countries
with economic heft, however, are fighting back.

In any case, while it might be true that the US would be less
weakened than other countries by a trade war — after all, the
US economy depends less on trade than almost every other country:
imports plus exports account for 27 percent of US gross domestic
product compared to a world average of 53 percent — the
damage to the US economy would be considerable nonetheless.
Cavalierly inviting a trade war because US “casualties”
would be lighter than, for example, China’s or
Europe’s, betrays a worrying absence of understanding of how
trade and the global economy really work.

Most global trade is in intermediate goods — the purchases
of producers, who have decentralized and diversified their
operations to improve efficiencies, reduce costs and compete more
effectively. Whereas in the 20th century, most of a company’s
production and assembly took place in one location, often under one
roof, the factory floor has since broken through those walls and
now spans borders and oceans. Taxing imports today is akin to
erecting a wall through the center of that 20th century assembly
line, impeding production and raising costs in similar fashion.
That helps explain the preponderance of opposition among US
manufacturers to Trump’s trade tack. US tariffs raise their
costs, and the resulting retaliation from foreign governments will
reduce their export revenues, squeezing profits from both ends.

In 2017, US goods imports totaled US$2.2 trillion — of
which US$1.1 trillion were purchases of raw materials, intermediate
goods and capital equipment — and US goods exports totaled
US$1.5 trillion. If Trump were to impose, for example, a 10 percent
across-the-board tariff on all imports, producer costs would rise
by roughly US$110 billion (or 10 percent of US$1.1 trillion).
Commensurate retaliation abroad would reduce US export revenues by
roughly US$150 billion (or 10 percent of US$1.5 trillion).
Together, the increased costs and reduced revenue would amount to a
US$260 billion reduction in manufacturing-sector profits. Last
year, the US manufacturing sector’s profits were US$550
billion, so a 10 percent import levy alone could end up cutting
profits nearly in half. When Trump claims that protectionism will
revitalize manufacturing and bring back jobs, one can only wonder
where he thinks the investment will come from without the profits
his tariffs will chase away.

False and Misleading

Trump’s trade policy is driven by misleading statistics
and the fallacious narrative that trade destroyed US manufacturing.
Trump pines for the days when US industry was unrivaled in the
world, accounting for a larger share of the US economy, and
employing a significant chunk of the labor force.
Manufacturing’s share of the US economy peaked in 1953 at
28.1 percent and has been on a downward trajectory ever since. In
2017, that share was only 11.6 percent of GDP.

But in 1953, US manufacturing’s value-added amounted to
US$110 billion, whereas in 2017, it reached a record high of
US$2.24 trillion. A sector that today produces more than six times
the value in real terms than it produced when it was of much
greater significance to the US economy can hardly be described as
declining. The sector employs about two-thirds the number of
workers as it did at its peak of 19.4 million in 1979, but that
reflects massive increases in output per worker, which is
attributable primarily to the adoption of new technologies.

Trump seems to believe that manufacturing is the only part of
the economy that matters — or the only part of the economy,
full stop. When citing trade balances, the president and his
advisors simply ignore US services, where the US is most
competitive and growing fastest. It’s as if Google and
Amazon, financial services and insurance companies, tourism and
intellectual property licensing don’t exist. Last year, US
services exports amounted to US$800 billion and generated a US$250
billion trade surplus.

For a nation whose consumers spend twice as much on services
than on goods, and where 90 percent of the workforce is employed
outside the manufacturing sector, the obsession with manufacturing
is misplaced. But even Trump’s concerns about manufacturing
are reserved for just a few heavy industries, such as steel and
automobiles. He fails to recognize — or at least his policies
fail to reflect — the diversity of industries within
manufacturing, many of which are worried about the pain from
Trump’s steel and aluminum tariffs. For every US$1 that steel
producers add to GDP, steel users add US$29; for every one job in
steel production, there are 46 in steel-using industries. While
Trump wants credit for “protecting” the steel industry
with a 25 percent import tariff, he and his advisers downplay the
adverse impact on steel-consuming producers.

Incoherent Uncertainty

Although it’s difficult to discern any coherent
trade-policy strategy, the administration’s incoherent
strategy seems to be to intentionally foment a climate of
uncertainty. Some suggest the policy dissonance is intended to
distract the public from the president’s mounting domestic
legal and ethical woes, but the persistent noise may be conducive
to the administration’s goal of repatriating global supply
chains.

Trump has sought to deter US companies from investing abroad.
His tweet-shaming of US firms that were considering establishing
assembly operations in Mexico, and his threats of 35 percent taxes
on re-importation into the US dissuaded a few from moving forward
with their plans. Trump’s repeated threats to withdraw the US
from the North American Free Trade Agreement; his insistence that
any revised NAFTA agreement should require that products contain
more US content to qualify for preferential treatment; and his
demand for a five-year sunset clause under which NAFTA would
automatically terminate unless the parties affirmatively agree to
extend its terms are all designed to create uncertainty. Why?

Trump fears that trade agreements, which extend preferential
access to the US market, encourage investment diversion and
outflows from the US to the economies of its trade agreement
partners. And he believes that by convincing the world that US
trade barriers could rise at any moment, foreign companies will
want to hedge their bets by investing in the US — inside the
tariff wall. It may sound cynical and self-defeating, but this kind
of thinking permeates the strategy sessions of America First
nationalists, who like to think the specter of President Ronald
Reagan’s threatened tariffs on automobiles induced Honda to
build the first foreign automobile plant in the US in 1982.

Either way, things have changed since then. The US is still the
world’s top destination for foreign direct investment, but
its share of the global stock of FDI has decreased from 39 percent
to 17 percent during the first two decades of the 21st century. The
determinants of investment are diverse and many, and the number of
viable destinations competing for that investment has increased as
countries have developed. Obviously, the size of the market is
important, but so are many other factors, including ease of access
to supply chains, respect for the rule of law, policy
predictability, and certainty in the business and regulatory
climate.

Trump is betting that by making policy less predictable and
creating an environment of “regime uncertainty,”
investment will flow into the US. Not only is the success of that
approach doubtful, but the objective itself — attracting
investment — is at odds with the president’s primary
goal, which is to reduce the trade deficit. When Americans buy more
goods and services from foreigners than they sell to them (trade
deficit), then they also sell more assets to foreigners than they
buy from them (capital surplus). Increasing inflows of investment
and reducing the trade deficit cannot happen at the same time,
hence the conclusion of policy incoherence.

Anger as Policy

A sense of grievance also permeates the America First narrative.
Trump and several of his advisors see the US as a benevolent giant,
having selflessly provided the resources, security and generosity
of spirit to rebuild Western Europe, East Asia and the rest of the
free world after the Second World War. Under the US security
umbrella, the rest of the West took advantage of America’s
kindness, took more from the till than they put in, skirted the
rules to obtain artificial advantages in certain industries,
adopted policies to promote their own interests at the expense of
the US industrial base, became economic rivals and began to adopt
views about foreign policy and geopolitics that weren’t in
lockstep with the US government’s. Or so the story goes.

Expectations that other governments will acquiesce to US foreign
and economic policy positions and accept the premise of American
exceptionalism predominate this mindset. That the US isn’t
treated with deference within the international trading system,
especially by the World Trade Organization’s Dispute
Settlement Body, for its selfless leadership in establishing the
rules and institutions of trade is an affront to Trump and his
advisors. This premise is the well-spring of Trump’s outrage
in learning that Canada, Mexico, the European Union and China would
even consider retaliating against the US for imposing punitive
tariffs on steel, aluminum and technology products.

The Trump administration’s concerns about China’s
mercantilist industrial policies have some validity, but its
approach to resolution has been an unmitigated disaster. The US
doesn’t need China to agree to buy US$200 billion more US
exports per year. Reducing the bilateral trade deficit is a silly,
misguided objective.

Instead, the US should be pursuing deeper, enforceable
commitments from China that it will operate within the letter and
the spirit of the rules-based trading system. The way to do that is
to stand shoulder-to-shoulder with like-minded governments and
demonstrate to Beijing that certain behavior won’t be
tolerated. Instead, the Trump administration has done the opposite.
It pulled out of the Trans-Pacific Partnership (TPP) trade accord,
it picked fights with allies by hitting them with steel and
aluminum tariffs, it transgressed WTO rules to impose sanctions
unilaterally and it isolated the US as an international scofflaw.
These missteps must be reversed, if that’s still
possible.

Those who subscribe to Trump’s points of view — that
trade is an “Us versus Them” proposition —
probably think that the president is doing the right thing in
subverting the institutions of global trade and provoking trade
wars. More sycophantic supporters consider Trump’s strategy
to be ingenious. Apologists who know better say that the president
is merely fulfilling his campaign promises — and how
refreshing is it that a politician is making good on his promises!
All are complicit in the unenlightened, provocative and possibly
unhinged trade policy that Trump has wrought.